Nigeria’s time-varying inflation threshold and asymmetric exchange-rate pass-through under changing fiscal and structural conditions

Abstract

This study examines the evolution of Nigeria’s inflation threshold and whether exchange-rate pass-through differs between moderate- and elevated-inflation conditions. It also evaluates the conditional associations of fiscal balance, food-import dependence, broad money growth, oil-price shocks, and trade openness with inflation and threshold movements. Annual data covering 1990–2025 are analysed using a Bayesian dynamic-threshold model in which the inflation boundary is treated as a latent, gradually evolving process estimated jointly with the inflation equation. Sequential Bayesian specifications and 10 year rolling regressions are used to assess robustness and temporal coefficient stability. The results provide strong evidence of asymmetric exchange-rate pass-through. Exchange-rate depreciation has no precisely estimated positive association with inflation below the threshold, whereas its above-threshold effect is large and positive. The posterior difference between the two regime-specific coefficients remains above zero across the core and sequentially expanded specifications. The annual posterior-median threshold averages approximately 33.6%, but the associated credible intervals are wide, indicating that the estimated boundary should not be interpreted as a precise policy target. The clearest above-threshold episode occurred during the high-inflation years of the early to mid-1990s, while the evidence for 2024 is less definitive. Fiscal conditions and exchange-rate depreciation display positive posterior means in the threshold-evolution equation, but their credible intervals include zero. Food-import dependence, the fiscal–monetary interaction, oil-price shocks, and trade openness are also imprecisely estimated, although broad money growth shows suggestive positive evidence in the robustness analysis. Rolling-window estimates further indicate that inflation relationships changed across macroeconomic periods. The study contributes to the inflation-threshold literature by modelling the threshold as an uncertain, time-varying latent process and demonstrating that currency depreciation is associated with substantially stronger inflationary pressure when inflation is already elevated. The findings underscore the importance of exchange-rate stability, credible fiscal and monetary coordination, and measures that reduce exposure to imported costs and domestic supply constraints.